On December 18, 2019, the U.S. Securities and Exchange Commission announced that it had settled charges against blockchain technology company Blockchain of Things Inc. (BCOT) for conducting an unregistered initial coin offering of digital tokens.

According to the SEC’s Order, BCOT raised nearly $13 million to develop and implement its business plans, including developing its blockchain-based technology and platform. As noted in the SEC’s Order, BCOT explained that its platform was intended to allow third-party developers to build applications for message transmission and logging, digital asset generation, and digital asset transfer. The SEC’s Order found that BCOT sold its digital tokens to U.S. investors and engaged four “resellers” to serve as the exclusive sellers of BCOT’s digital tokens in certain foreign countries without restrictions on resale of those tokens to U.S. investors. The Order further found that BCOT did not register its ICO pursuant to the federal securities laws, nor did it qualify for an exemption from the registration requirements.

The SEC Order and press release made two important points that have become commonplace in SEC discussions of ICOs. First, the issue of whether BCOT Tokens qualified as a security is determined under the Howey test (see here). Second, the ICO was conducted after the SEC had issued its DAO report, which warned that ICOs can qualify as securities offerings. According to the SEC’s Order, the ICO violated federal securities laws regarding the registration of securities offerings.

The order requires BCOT to cease and desist from committing or causing any violations of the registration provisions of the federal securities laws, and imposes a $250,000 penalty. Pursuant to the order, BCOT undertakes to return funds to those investors who purchased tokens in the ICO and request a return of the funds. The company also will register its tokens as securities pursuant to the Securities Exchange Act of 1934 and will file required periodic reports with the Commission. BCOT consented to the order without admitting or denying the findings.